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Appeared on: Tuesday, May 04, 2010
Decline in Music Sales Cannot Be Attributed to File Sharing

A university study of Dutch file-sharers showed that there is no sharp divide between file sharers and others in their buying behaviour. On the contrary, file-sharers are content industry's largest customers, the study showed.

Worldwide, sales of recorded music have been in decline for several years, while file sharing is growing rapidly. Is this a mere correlation, or is it safe to say that there is a causal relation? Although a widely debated
phenomenon, reliable numbers on the incidence and economics of file sharing are relatively sparse, particularly for films and games.

A survey held in the Netherlands by Prof. Nico van Eijk of the University of Amsterdam is part of the research aimed at filling this gap in order to estimate short-term welfare effects of file sharing.

According to the survey, free downloading or file sharing is a very common phenomenon across all socio-demographic groups of the Dutch population. 44% of the Dutch Internet population over the age of 15 that had Internet access, admit to file sharing on one or more occasions in the previous 12 months, which works out at around 4.7 million people. Music is the most downloaded entertainment product: 40% of those who have Internet access do so. Note that this figure is remarkably in tune with figures in France and the United States. Films (13%) and games (9%) follow at some distance. File sharers are predominantly young (15-24 years), male, particularly when it comes to films and games.

A notable finding of the survey is that a large number of file sharers are unable to say what method or technology they use for downloading, e.g. P2P, Usenet, newsgroups, FTP address. Most file sharers said they only engaged in downloading and did not upload. This would seem improbable as most P2P programs upload automatically. It seems likely that many file sharers are unaware that they are uploading. A mere one in twenty file sharers admit to adding new uploads themselves.

Buying and file sharing turn out to go hand in hand, according to the survey. Music sharers are as equally likely to buy music as other people: 68% of file sharers also purchase music. File sharers buy as much music as non-file sharers. However, file sharers spend more money on merchandise and go to concerts significantly more frequently.

As for films, file sharers turn out to buy significantly more DVDs than nonfile sharers. On average, file sharers and non-file sharers go to the cinema equally often, the survey showed.

Game sharers also buy games, and significantly more frequently too: 67% of file sharers are buyers as well. And if they buy, they buy significantly more games than non-file sharers. These results are summarized in Table 1.
Among file sharers, 63% of music downloaders might yet buy the music they first got for free online. Their main reasons for buying are loving the music ? a key motive for over 80% ? or wishing to support the artist (over
50%). Owning the CD sleeve and booklet are mentioned by a third of eventual buyers, as well as the higher quality of the CD.

Between 50% and 60% download to discover new genres and
directors/actors. 63% of game sharers report sometimes buying a previously downloaded game at a later date. Their main reasons include thinking it a really good game. Wanting to own the original box and game were also
frequently mentioned.

"All in all, these figures show that there is no sharp divide between file sharers and others in their buying behaviour," the study says. "On the contrary, when it comes to attending concerts, and expenses on DVDs and games, file sharers are the industry's largest customers. Note that no causal relationship is implied here. Aficionados of music, games or films will typically buy more, get into related products more but also download more."

In order to estimate the turnover that the music industry may be missing out on due to file sharing, the survey asked file sharers what they would consider a reasonable price for a CD, film or game they would really like to
own, and how likely they would be to purchase it for this price. Note that this is more than what they would be willing to pay on average for the products they are downloading. According to the survey, three-quarters of music sharers are willing to pay at least €8 for a CD. The average 'reasonable price' for music is higher than for DVDs, which turns out to be €5.

The effect of file sharing on sales is ambiguous. Research on this issue results in descriptions of mechanisms through which file sharing either results in an increase or, conversely, in a decrease in digital media sales, or
in having no impact on sales whatsoever. These various potential mechanisms are summarized in Table 3. The most prominent positive effect is the sampling effect: consumers are introduced to new music and this creates new demand. When downloading serves consumers whose demand
is driven by a lack of purchasing power, the effect on sales is neutral. File sharing has a negative impact on buying when it replaces paid-for consumption.

"Given the different possible effects above, it may not come as a surprise that the findings of empirical studies into the causal or other relationships between downloading and buying music vary widely, ranging from positive neutral to negative,", the study says. "There does not appear to be a clear relationship between the decline in sales and file sharing. The effect on revenue from concerts and merchandise is unknown. The state of play in the film industry has hardly been investigated to date, but available findings suggest a negative relationship. In the games industry download volumes are low and its implications largely unknown."

"The main conclusion that can be drawn from the above is that not every file downloaded does result in one less CD, DVD or game sold," Van Eijk's concludes. "The degree of substitution is difficult to determine."

The entertainment industry is experiencing the effects of file sharing. The proliferation of digital distribution networks combined with the availability of digital technology among consumers has actually broken the entertainment industries' control over the access to their products.

"Turnover in the recorded music industry is in decline, but only part of this decline can be attributed to file sharing," the study concludes. "Conversely, only a small fraction of the content exchanged through file sharing networks comes at the expense of industry turnover. This renders the overall welfare effects of file sharing robustly positive."

Van Eijk notes that for a considerable amount of time, the industry remained unable to stem the tide of unlicensed music file sharing with their conservative strategy of abstaining from innovation, promoting legal measures against supposed offences and digital rights management. This strategy resulted in the current backlash, providing space for a new entrant establishing a major brand in the online music business: Apple's iTunes. Reinvention of the business model looks like the only way out for the traditional players in the music industry. The music economy appears to be facing a shift in spending away from recordings to concert tickets and, to a lesser degree, merchandise. The advance of so called 360-degree artist contracts is a step towards greater diversification of sources of income and underlines the clear connection that exists between various revenue sources in different music markets: recordings, live music and merchandise. Recent research for Sweden indicates that total revenues from recorded music, live concerts and collecting societies remained roughtly stable between 2000 and 2008 (JOHANSSON & LARSSON, 2009).

On the other hand, the film industry is feeling the file-sharing pain less than is the music business, but this looks about to change as broadband is rolled out further.

The 'digitally native' games industry would seem better positioned to respond to the impact of file sharing, although some segments of the market, particularly the one for PC games, witnesses effects similar to the music
industry, the study shows.

"The entertainment industry should step outside the box of the traditional value chain and venture into a host of other markets through the creation of value networks. A strategy that focuses solely on lawsuits and
digital rights management (DRM) is not the best response, in particular as it remains to be seen whether a fully authorised, paid-for downloading market would generate sufficient revenues to stay in business. Even in a
hypothetical future without file sharing, a hybrid business model would appear to be the solution," Van Eijk concludes.

"The survey held among Dutch Internet users has shown that file sharing is here to stay and that people who download are at the same time important customers of the entertainment industry. The point of no return has been
reached and it is highly unlikely that the industry will be able to turn the tide."
"What is more, there is no guarantee that a situation will ever arise in which a majority of digital downloads will come from an authorised source. Whatever the future brings, the time that will pass between now and a 'clean' future is
too long for the industry to sit back and wait, without making an effort to innovate. And so the entertainment industry will have to work actively towards innovation on all fronts. New models worth developing, for example,
are those that seek to achieve commercial diversification or that match supply and end-user needs more closely. In such a context, criminalizing large parts of the population makes no sense. Enforcement should focus on large scale and/or commercial upload activities," Van Eijk says.

In the end, says van Eijk,"..it turns out that online media provide a number of new avenues for creators and producers to reach their intended audiences, without significant gatekeepers preventing them from doing so. It is up to government, as part of its cultural policy and its policy to strengthen the country's innovative power and competitive edge, to consider identifying the promotion of innovation in the entertainment industry as a key priority. Introducing new protective measures does not seem the right way to go."